Irish growth forecasts cut, IMF warns of subdued global growth

Both the IMF and the Department of Finance (DoF) on Tuesday downgraded growth forecasts for the Irish economy in response to the fallout risk from Brexit and a subdued global outlook.

The Irish economy is forecast to grow 4.2% in gross domestic product (GDP) terms in 2016, down from a 4.9% previous forecast while the GDP growth forecast for next year was cut from 3.9% to 3.5%. Meanwhile the International Monetary Fund in the October issue of its twice yearly global economic outlook, cut 0.1% off its 2016 Irish GDP forecast to 4.9% and it reduced 2017 by 0.4% of GDP to 3.2%.

John McCarthy, DoF chief economist, told the Budgetary Oversight Committee of the Dáil Tuesday that just 5 companies account for 30% of all Irish exports — the exports of service companies such as Google are boosted by Double Irish tax avoidance. “What we can do to mitigate this concentration risk is to remain competitive and ensure workers have the appropriate skills,” he said.

UK stock markets surged on Monday boosted by a slump in the pound as it fell to a new 31-year low against the dollar amidst expectations that the UK likely will leave the single market after Brexit — a development that is called a "hard" Brexit.

The FTSE 100 index of the UK's top 100 companies, dominated by firms that earn revenues in dollars, surged to 7,074.34, closing at its highest level since the record finish of 7,104 in April 2015.

The pound fell to its lowest level against the US dollar since June 1985, falling to $1.2721, down 0.9%. Against the euro, sterling hit a three-year low of €1.1365, down 0.8%.

IMF global forecasts

Global economic growth will remain subdued this year following a slowdown in the United States and Britain’s vote to leave the European Union, the IMF said in its October 2016 World Economic Outlook report.

“Taken as a whole, the world economy has moved sideways,” said Maurice Obstfeld, IMF chief economist. “We have slightly marked down 2016 growth prospects for advanced economies while marking up those in the rest of the world,” he said.

The report highlighted the precarious nature of the recovery eight years after the global financial crisis. It raised the spectre that persistent stagnation, particularly in advanced economies, could further fuel populist calls for restrictions on trade and immigration. Obstfeld said such restrictions would hamper productivity, growth, and innovation.

“It is vitally important to defend the prospects for increasing trade integration,” Obstfeld, said. “Turning back the clock on trade can only deepen and prolong the world economy’s current doldrums.”

To support growth in the near term, the Fund said central banks in advanced economies should maintain easy monetary policies, the IMF said. But monetary policy alone won’t restore vigour to economies dogged by slowing productivity growth and aging populations, according to the new report. Where possible, governments should spend more on education, technology, and infrastructure to expand productive capacity while taking steps to alleviate inequality. Many countries also need to counteract waning potential growth through structural reforms to boost labour force participation, better match skills to jobs, and reduce barriers to market entry.

The world economy will expand 3.1% this year, the IMF said, unchanged from its July projection. Next year, growth will increase slightly to 3.4% on the back of recoveries in major emerging market nations, including Russia and Brazil (see table below).

Advanced economies: US slowdown, Brexit

Advanced economies will expand just 1.6% in 2016, less than last year’s 2.1% pace and down from the July forecast of 1.8%.

The IMF marked down its forecast for the United States this year to 1.6%, from 2.2% in July, following a disappointing first half caused by weak business investment and diminishing pace of stockpiles of goods. US growth is likely to pick up to 2.2% next year as the drag from lower energy prices and dollar strength fades.

Further increases in the Federal Reserve’s policy rate “should be gradual and tied to clear signs that wages and prices are firming durably,” the IMF said.

Uncertainty following the “Brexit” referendum in June will take a toll on the confidence of investors. UK growth is predicted to slow to 1.8% this year and to 1.1% in 2017, down from 2.2% last year.

The Euro Area will expand 1.7% this year and 1.5% next year, compared with 2% growth in 2015.

“The European Central Bank should maintain its current appropriately accommodative stance,” the IMF said. “Additional easing through expanded asset purchases may be needed if inflation fails to pick up.”

Growth in Japan, the world’s number 3 economy, is expected to remain subdued at 0.5% this year and 0.6% in 2017. In the near term, government spending and easy monetary policy will support growth; in the medium term, Japan’s economy will be hampered by a shrinking population.

Emerging market growth expected to accelerate

In emerging market and developing economies, growth will accelerate for the first time in six years, to 4.2%, slightly higher than the July forecast of 4.1%. Next year, emerging economies are expected to grow 4.6%.

However, prospects differ sharply across countries and regions.

In China, the IMF says policymakers will continue to shift the economy away from its reliance on investment and industry toward consumption and services, a policy that is expected to slow growth in the short term while building the foundations for a more sustainable long-term expansion. Still, the report says China’s government should take steps to rein in credit that is “increasing at a dangerous pace” and cut off support to unviable state-owned enterprises, “accepting the associated slower GDP growth,” the IMF said.

China’s economy, the world’s second largest, is forecast to expand 6.6% this year and 6.2% in 2017, down from growth of 6.9% last year.

“External financial conditions and the outlook for emerging market and developing economies will continue to be shaped to a significant extent by market perceptions of China’s prospects for successfully restructuring and rebalancing its economy,” the IMF said.

The IMF says growth in emerging Asia, and especially India, continues to be resilient. India’s gross domestic product is projected to expand 7.6% this year and next, the fastest pace among the world’s major economies. The IMF urged India to continue reform of its tax system and eliminate subsidies to provide more resources for investments in infrastructure, education, and health care.

Sub-Saharan Africa’s largest economies continue to struggle with lower commodity revenues, weighing on growth in the region. Nigeria’s economy is forecast to shrink 1.7% in 2016, and South Africa’s will barely expand. By contrast, several of the region’s non-commodity exporters, including Côte d’Ivoire, Ethiopia, Kenya, and Senegal, are expected to continue to grow at a robust pace of more than 5% this year.

Economic activity slowed in Latin America, as several countries are mired in recession, with recovery expected to take hold in 2017. Venezuela’s output is forecast to plunge 10% this year and shrink another 4.5% in 2017. Brazilwill see a contraction of 3.3% this year, but is expected to grow at 0.5% in 2017, on the assumption of declining political and policy uncertainty and the waning effects of past economic shocks.

The IMF says countries in the Middle East are still confronting challenging conditions from subdued oil prices, as well as civil conflict and terrorism.

Overarching policy challenge

Given the still weak and precarious nature of the global recovery, and the threats it faces, the IMF underscored the urgent need for acomprehensive, consistent, and coordinated policy approach to reinvigorate growth, ensure it is distributed more evenly, and make it durable. "By using monetary, fiscal, and structural policies in concert — within countries, consistent over time, and across countries — the whole can be greater than the sum of its parts,” Obstfeld concluded.